Adbi Dynamic Regional Dev

An Overview
The Philippines and Regional Development

Arsenio M. Balisacan, Hal Hill, and Sharon Faye A. Piza
Excerped and adapted from

The Dynamics of Regional Development:
The Philippines in East Asia
Edited by Arsenio M. Balisacan and Hal Hill
The views expressed herein are the views of the author and do not necessarily
reflect the view or policies of the Asian Development Bank Institute. Names of
countries or economies mentioned are chosen by the author/s, in the exercise of
his/her/their academic freedom, and the Institute is in no way responsible for such
usage.
Adapted from the forthcoming book, The Dynamics of Regional
Development: The Philippines in East Asia, edited by Arsenio M.
Balisacan and Hal Hill, published by Edward Elgar Publishing Ltd.
and Ateneo de Manila University Press.
Accompanying CD-ROM contains:

• This condensed overview
• Complete first chapter of the book with tables and figures
• Online ordering information for the book
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© 2006 Asian Development Bank Institute.

Produced by Grant Stillman and Patricia Decker for Knowledge
Management Unit 10/06
The views expressed in this overview are those of the authors and do
not necessarily reflect the views or policies of the Asian Development
Bank Institute.
Contents of this Overview
About this Volume ............................................................................... 2
Ten Key Lessons and Observations ..................................................... 3
The Philippine Case ........................................................................... 11
The Issues........................................................................................... 14
East Asian Comparisons..................................................................... 18
The Philippine Experience ................................................................. 20
Conclusion.......................................................................................... 30
For Further Information ..................................................................... 31

2 The Philippines and Regional Development
About this Volume
What kind of decentralization policies are best to promote regional

development? How should countries in the Asia-Pacific region
pursue their economic devolution programs?
This volume examines regional development in the Philippines to

provide lessons that can be applied not only in that country, but also
internationally. They are grouped below under two main headings:
lessons in regional development dynamics and observations on the
decentralization program.
The overview that follows the ten points below provides greater detail
on the Philippine case in an Asian context. The CD-ROM that
accompanies this volume contains the first chapter of The Dynamics of
Regional Development: The Philippines in East Asia. The chapter
includes detail and supporting tables and figures not given in this
overview. Ordering information for the complete book can be found
on page 34 of this volume.
Overview 3
Ten Key Lessons and Observations
1. Regions better connected to the global economy grow more rapidly, and this
process may result in increased regional inequality
Trends in the global economy have shaped the economic geography of

an increasingly open Philippine economy. Regions better connected to
the global economy can be expected to grow more rapidly. Powerful
international evidence on this includes the People’s Republic of
China’s coastal regions, Mexico’s border with the US, and Bali in
Indonesia.
The Philippine case differs from those of the above countries in two
ways. One difference is that although no single region in the country
can be singled out as the most globally connected, a number of
“enclaves” enjoy good global connections. These include Manila and
its surrounds as well as Cebu, the second city. The other difference
relates to the impact of international migration and remittances;
remittances now amount to almost 50% of merchandise exports, and
the workers probably come more from better-off regions. These two
impacts from the global economy almost certainly increase regional
inequality in the Philippines.
2. National growth and regional development depend on investments in key

public goods, physical infrastructure, and human capital
As a corollary to the first lesson, investments in key public goods,

physical infrastructure, and human capital are major drivers of both
the national growth rate and regional development patterns. For
example, the Philippines is significantly under-investing in
infrastructure by East Asian standards.
This scarcity of infrastructure funds has affected regional development

patterns. The Philippine Government (and donors) have invested more
in internationally-oriented infrastructure (ports, harbors and associated
facilities) than in domestic transport networks and corridors. This
investment pattern has reinforced the globally connected enclaves but
has inhibited a denser set of domestic connections from forming.
3. Poor regions stay poor without changes in national policy
No major changes have occurred in Philippine economic geography

over at least the past two decades and probably for longer. The
ranking of regions by socio-economic indicators has changed
relatively little: the regions with above-average indicators continue to
be Manila and its surrounds, while the relatively poorer regions
remain so. Most of the traditionally poor regions of western Mindanao
have slipped further behind owing to the prolonged state of conflict
and local mismanagement. This lack of improvement highlights both
the slow rate of national economic growth (rankings would be more
likely to change with faster growth) and the absence of any major
change in national policy settings, aside from the decentralization.
4. Program neither a success nor a failure
A decade and a half on after the main decentralization program began

in 1992, decentralization in the Philippines has been neither a notable
success nor a disappointing failure. The reform has not delivered what
some of its proponents might have expected: a decisive shift of power
and resources out of the center, a vibrant, efficient and responsive
system of local government, and a general lift in the quality of
governance. Still, the reform can hardly be termed a failure. It has
broadly worked: some administrative and political authority has been
Overview 5
transferred to the regions, and some local governments have

performed well.
The program's success may have been limited by some shortcomings

at the center. The Philippine Government has not reliably delivered
three things that a decentralized system of government needs from
central government to function effectively: good quality national
governance, sound fiscal policy, and rapid economic development.
5. Program poorly executed despite good planning
The Philippine decentralization program was carefully prepared, well-

documented, and generally based on sound principles. However, the
record of implementation has been mixed.
On paper, the division of responsibilities between the central and local

governments is clear, the assignment of functions across jurisdictions
follows public finance principles, and there is reasonable clarity of
expenditure assignment. In practice, however, current arrangements
do not devolve efficiently and cleanly to local governments. The
division of responsibilities remains ambiguous. The central
government has a tendency to intervene arbitrarily in what are
considered local government responsibilities, including the transfer of
unfunded mandates. Over a decade on, it has yet to transfer all of the
staff who were supposed to be relocated to local government units
(LGUs).
6. Balance of central-local governments remains a problem
The record has also been mixed with regard to vertical and horizontal
balance between and among the central and local governments. The
LGUs remain relatively small actors in the Philippine economy; their
expenditure amounts to just 3.3% of GDP after decentralization, a

portion much smaller than that in most decentralized regimes. The
vertical imbalance is growing between LGU revenues and
expenditures: in terms of the public sector aggregate, the LGUs’ share
of revenue is three times larger than that of their expenditures.
Moreover, the IRA allocations do not appear to be consistent with the
objective of horizontal equity, although outcomes vary depending on
the composition and size of ad hoc “categorical grants.”
7. Government tiers lack coordination
Although the decentralization program was initiated over a decade ago,

coordination between and among different tiers of government
continues to be inadequate. An effectively functioning center-regional
governance partnership requires a clear division of responsibilities,
adequate funding, and bureaucratic capacity at both levels. The
current Philippine arrangements are deficient in all three respects. A
range of services, including roads, have a “missing middle” in their
provision. In sectors such as agriculture, where large externalities are
present (in R&D, extension, infrastructure, and environmental
management), either a central government presence or effective
coordination mechanisms among local governments (or both, mostly
likely) are needed.
8. Governance quality varies among local governments
Governance quality varies considerably across local governments. In

numerous cases, effective local leadership has reformed hitherto
poorly governed regions. What remains unclear is whether one can
identify structural determinants of the differences between regions that
improve and those that do not, or whether instances of high quality
governance are accidents of history, driven by the strongly
Overview 7
personalistic nature of Philippine politics. Instances exist of emulation

and replication, particularly in regions that share borders. Still, one
would hesitate to argue that the ideal of competitive regionalism has
become a feature of Philippine local government, in the sense that
better governed regions are consistently being rewarded with a reform
dividend of in-migration of mobile factors, especially investment and
skilled labor.
9. Program has had little effect on regional disaffection
Has decentralization ameliorated local disaffection with the center in

the country’s troubled regions? This was one of the reform’s intended
objectives. Of course, regional disaffection has many dimensions—
national and regional, economic and political—and a relatively
modest decentralization program is unlikely to be able to overcome all
the problems.
In a regional context, the Philippines could be seen as neither a

success nor a failure in this respect. Unlike Indonesia, the country’s
territorial integrity has been preserved. Moreover, the central
government does not have the option of repressing rebellion in
disaffected regions, as some nearby states do. And even Thailand,
long seen as a model for successfully managing disaffection in its
Muslim south, has experienced serious problems in recent years.
Nevertheless, the deep-rooted conflict in Mindanao goes on. Socio-

economic indicators in the Autonomous Region of Muslim Mindanao
(ARMM) have worsened relative to the rest of the nation. Governance
in this autonomous region has been very weak, including its record on
education. Although the primary responsibility for resolving the
conflict lies with the central government the contribution of the
decentralization program has also been minimal.
10. Nation-wide policy agenda needed in addition to addressing region-specific

issues
The Philippines requires both a common, nation-wide policy agenda

as well as a set of region-specific challenges. The nation-wide agenda
should include policies to accelerate national growth and significant
increases in public and private investment in physical infrastructure
and human capital. Also needed is at least a minimalist set of nation-
wide social objectives relating to education, health, and related sectors.
Regional policy, however, draws attention on diversity; a common

policy template cannot be applied to all regions. For example, in
Mindanao the most urgent goal is the resolution of conflict.
Infrastructure, by contrast, is relatively good, reflecting the attention
the region has received from the central government and donors.
Elsewhere, the mix of required policy interventions differs. For
regions with long-term poverty, infrastructure investment and
attention to local economic opportunities will likely be the key,
alongside national minimum needs and poverty targeting programs,
though these will be focused more on individuals and households than
on regions.
Overview 9
The Philippines: Major Administrative Groupings, 2003

Overview 11
The Philippine Case
Challenging physical environment
A glance at the map on the opposite page immediately draws attention

to the Philippines’ unusual geography. Its 7,100 islands are
emphasized in the country’s tourist promotion programs, but they also
highlight a deeper reality. With a population nearing 90 million people,
the country is extraordinarily diverse in terms of geography, ecology,
natural resource endowments, economy, ethnicity, and culture. It is
the second-largest archipelagic state in the world, after Indonesia. An
estimated 110 ethnic groups live there, and 170 languages are spoken.
Unevenly distributed economic activity
Economic activity is highly uneven and is concentrated around the

national capital and two adjacent regions, Central Luzon and Southern
Luzon. Together, these three regions (out of a total of 16) produce
about 55% of total national output. (In a more recent classification,
Southern Luzon was split into two regions, Mimaropa and
Calabarzon.)
It is increasingly evident that the regions of the Philippines that are the
most connected to the global economy are growing faster than the rest
of the country. In turn, these regions are as well connected to, for
example, neighboring Hong Kong, China as they are to their
hinterlands—these global connections may be even better than the
domestic ones.
International trade has become an increasingly important driver of

local-level development. The bridges to the global economy—ports,
airports, telecommunications—determine how effectively these
regions can connect to the growth engine of the world economy. For
example, almost all the growth in Philippine exports since 1990 has
originated from free trade zones. In consequence, where these zones
and their accompanying infrastructure are located becomes a key
arbiter of regional dynamics.
Uneven living standards
Socio-economic indicators also vary significantly across regions. In

the case of poverty incidence, for example, geography matters. In
2003, poverty incidence in the national capital and two adjacent
regions was estimated to be 13%, compared to the combined figure of
34% for the other 14 regions. The head-count poverty estimate for the
two poorest regions, Western Mindanao and ARMM, both in the
southwest of the country, was more than 10 times that of the national
capital.
Challenging center-region relations
Philippine policymakers have long grappled with the issue of how to

promote broad-based regional development in such a diverse setting,
and what center-region structures are optimal. The pendulum has
swung back and forth between devolution and central authority.
During the 20-year presidency of Ferdinand Marcos through to 1986,
for example, the power of the center increased significantly. Next, a
major decentralization program began in 1992 with the enactment of
the Local Government Code, and efforts in devolution have continued
since that time.
Overview 13
Lessons relevant to other decentralizing countries

Examining regional development in the Philippines can provide
significant lessons to be applied not only in that country, but also
internationally; other countries introducing more recent
decentralization programs could learn much from its experience.
Central governments nearly everywhere are under pressure to devolve

administrative authority and financial resources to the regions. In
some cases, this process is linked to transitions from a centrally
planned to a market economy (e.g., People’s Republic of China,
Russia, Viet Nam). In others, it occurs in the wake of serious
economic and political crises, following the overthrow of a centralized,
authoritarian regime (e.g., Marcos’s Philippines, Soeharto’s
Indonesia). Fear of national integration (Indonesia again, post-Timor
Leste) is sometimes a factor. Some experiments are “big bang” and
hasty (e.g., Russia and Indonesia, much of Latin America), while
other countries have a long history of federalism and have well-
developed institutional structures governing center-region relations
(e.g., India, Malaysia). We examine the Philippine case comparatively,
in the context of the growing literature on the theory and practice of
regional development in developing countries.
The Issues
Economic geography and regional development
Regional science is now at the forefront of development issues. In

understanding the dynamics of regional development we consider the
fusion of trade and geography, commonly referred to as the new
economic geography. In this view, the notion of space has to be taken
seriously in economic, social, and institutional analysis. We ask, in a
Philippine and a comparative East Asian context:
• What determines sub-national patterns of development, and are

these factors similar to those shaping inter-country differences?
• What determines trends in sub-national inequality, and should high
inequality be an issue of concern?
• Are bypassed regions likely to become a serious national (and
international) challenge as central governments retreat in authority
and place less emphasis on inter-regional equity?
• As national boundaries become more porous and central
governments less powerful, will cross-border “natural economic
zones” become increasingly important in the global economy?
• What are the key issues and lessons in decentralization reforms, and
why are some programs more successful than others?
• Is regional (sub-national) competition likely to improve local-level
(and therefore national) governance quality?
The twin themes of decentralization and globalization unite and

integrate our study. Both have profoundly altered the character of
governance and the location of economic activity in developing
countries. Decentralization has resulted in a restructuring of the
bureaucracy and a significant shift in public sector resources toward
local governments. Globalization has integrated local economies
Overview 15
within the global economy. Policy reforms have driven this process,
reinforced by rapid technological progress in telecommunications,
information flows, and logistics.
Reasons behind decentralization
Of course, the motives for decentralization vary widely. Economic

and political crises may trigger major (and sometimes hasty)
decentralization programs, especially when authoritarian, centralized
regimes crumble. Within the past two decades, for example, Indonesia,
the Philippines and Russia have all experienced deep economic crises
and far-reaching institutional and political change. Increased regional
autonomy featured prominently in the democratic reform agenda of all
three countries.
Especially in large, spatially diverse countries, disenchantment

frequently arises with rule from the center. Local communities often
see capital cities as corrupt, authoritarian, arrogant, and remote.
Regional development concerns are also motivated by frustration with
failed attempts to achieve progress in so-called bypassed regions.
While capital cities might tend to ignore these regions, in many cases
strategic and political considerations dictate that they should do
otherwise.
In some countries, increased regional autonomy may be an incidental

consequence of the transition from plan to market. As governments
dismantle a command economy and the size of the state enterprise
sector shrinks, economic authority inevitably passes from central
government planners to private economic agents. The effect is that
power is decentralized even in the absence of a formal
decentralization program. The PRC, Russia, Viet Nam, and other
formerly centrally planned economies are examples of this. Specific
decentralization initiatives were also in place in all these cases, but the
initial driving force was the decision to de-emphasize central planning.
How to achieve decentralization
Although there are diverse and powerful pressures to shift power and
resources out of the center there is no consensus on how far and how
quickly decentralization ought to proceed; it is not an automatic, one-
size-fits-all fix. The general presumption is that policy competition
between regions is desirable and that, beyond the obvious areas of
central government responsibility, such as macroeconomic policy, law,
foreign policy, and defense, decision-making should be as close as
possible to stake-holders.
Moreover, to what level of local government should authority be

decentralized? In turn, this leads to a question of definition: What
constitutes “regions”? Official definitions are frequently arbitrary and
are often changed. Boundaries may reflect political or ethnic divides
rather than constituting natural economic zones.
Understanding regional differences
Much focus has been given to explaining international differences in

growth rates, but inter-regional differences have received much less
attention. Can one draw on the former to help explain the latter? In a
world of perfect factor mobility and homogeneous nation-wide
institutions, the answer is presumably no. However, institutions
clearly do differ among regions in many countries; and factor and
product markets in developing countries are often poorly integrated.
Similarly, the evidence on long-term trends in inter-regional

inequality is mixed. One theory is that inequality rises through to
Overview 17
some turning point, and then declines. The intuition underlying this
reasoning is that, at early stages of development, rapid growth is an
inherently unequalizing force. However, beyond some threshold,
equalizing forces come into play; for example, markets begin to work
better and governments introduce explicit fiscal equalization
mechanisms.
East Asian Comparisons
We compare and draw lessons from the two major developing East
Asian economies: the PRC and Indonesia. Both are decentralizing rapidly,
both are considerably larger than the Philippines, and both, especially
the PRC, have higher long-term average growth than the Philippines.
People’s Republic of China
The PRC’s rapid economic growth has been accompanied by rising

inter-regional inequality, particularly since the early 1990s. Four main
factors account for this recent increase in inequality. First, the regions
differ dramatically in their international orientation. In the eastern
zone, the export/GRP ratio was 41% in 2003—some eight times that
of the western zone. Similarly, foreign direct investment constitutes
about 11% of investment in the east, but only 1% in the still SOE-
dominated economy in the west. Second, until recently, restrictions on
labor market mobility, in particular the huko (household registration)
system, meant that the labor market was unable to play a role as an
inter-regional equilibrating mechanism. Moreover, some barriers to
inter-regional commerce remain in place. Third, domestic physical
infrastructure has not kept pace with the rapid growth, thus reinforcing
the policy-induced international commercial orientation of firms in the
eastern zone. Finally, the devolution to the PRC’s regions has
reinforced the general trend toward the “retreat from inequality.”
Perhaps this rapid increase in inequality will plateau. In recent years,

the central government has become more concerned with inter-
regional equity. There are measures to boost investment in agriculture,
infrastructure and public education in the central and western regions.
Internal migration has been freed up and the lower cost base in the
central and western regions is attracting more investment.
Overview 19
Indonesia
Indonesia shares more similarities with the Philippines. It is an

archipelagic nation and it embarked on a decentralization program in
the wake of a major economic crisis and a weakened central
government. It also has resource-rich frontier zones with a long
history of insurrection. Thus, lessons from the Philippine experience
apply particularly well to Indonesia.
Nevertheless, there are also significant differences between the two

countries. Although Indonesia was a highly centralized regime under
Soeharto (arguably more so than was the Philippines under Marcos),
regional development was remarkably broad-based. Most regions
grew at similar rates, resulting in no significant deterioration in inter-
regional inequality.
A second difference has been the concentration of resource-rich

enclaves, principally in northern and central Sumatra, East Kalimantan,
and Papua (Irian Jaya). Third, while there are parallels between the
major islands of Java and Luzon, the differences are just as great. Java
has a much greater population concentration. Moreover, the regional
dynamics have differed and the two countries’ sub-national
development dynamics have thus differed significantly over the past
quarter-century.
Finally, as in the PRC and the Philippines, successive Indonesian

governments have struggled to promote growth in poor and bypassed
regions. Much of the efforts have focused on the country’s vast,
marine-rich eastern islands. These have poorer infrastructure, more
limited human capital (with some notable exceptions), and are distant
from the commercial (and political) mainstream.
The Philippine Experience
Evolution of regional policy
The Philippines has evolved into a nation state since the highly
decentralized Spanish colonial era, in which the Catholic Church was
as much a national institution as the Manila government. In the
Spanish period the central administration was weak and their formal
structures were not as important as social relationships within local
communities. These communities were largely self-sufficient and
local histories and orientation made national development planning
difficult.
Nevertheless, particularly from the American colonial period (1898–

1946) onwards, national governments have become increasingly
important. Philippine development thinking and planning in the 1960s
began to take regionalization as a strategy to attain national
development goals. Further commitment to this strategy was made in
the 1970s.
In the late years of the Marcos regime, serious work began on a

reformulation of center-local relations. In the 1980s, of course, the
national political context changed dramatically with the return of
democracy and the advent of a fiscally incapacitated central
government. However much of the preparatory administrative work
had already been undertaken, and on paper the division of
responsibilities between the center and regions was reasonably clear.
In fact, the Local Government Code (LGC) of 1991 is actually similar
to a draft prepared in 1983. The Philippines was one of the first
countries in East Asia, and indeed in the developing world, to embark
on a program of decentralization, in 1991.
Overview 21
Current regional structures
The country is a unitary state, a presidential republic with a bi-cameral

legislature. The central government has approximately 20 departments
and agencies. The country is divided into 17 regions. However, with
the exception of the Autonomous Region of Muslim Mindanao
(ARMM), these are essentially administrative regions in which central
government regional offices are located.
The lines of authority from the center changed in 1992. However,

contrary to widespread impressions, there was no pronounced
fragmentation of administrative and political authority. The number of
regions increased by four, hence complicating statistical analysis. As
of 2005, there were 80 provinces, 114 cities, 1,496 municipalities and
41,945 barangays. In 1991, immediately prior to decentralization, the
relevant numbers were respectively 75, 60, 1,543, and 41,820. The
major change has therefore been the near doubling of cities,
accompanied by a decline in the number of municipalities. This
change reflects in part the country’s continuing high population
growth and urbanization. But the more generous fiscal treatment of
cities, especially chartered cities, has also been a factor.
The LGC provides a comprehensive framework for centre-region

relations. It specifies the transfer to local government units (LGUs) of
a wide range of functions and services, and divides responsibility for
their provision among the various local tiers. Some 70,000 staff from
central government departments were to be transferred to the LGUs,
with the largest transfers from the Departments of Health (65% of the
total) and Agriculture (25%). However, programs considered to be
“national” are retained by the central government. The Code also
specifies a division of responsibility with regard to revenue
assignment.
The political economy of regional governance reflects national

patterns. In particular, (a) there are frequent turnovers of
administrations; (b) the bureaucracy is weak and much of it highly
politicized; and (c) major families heavily penetrate both the
administrative and political wings of government.
Regional development patterns
Manila dominates the Philippine economy, generating a little over

one-third of the country’s GDP in recent years. Luzon in aggregate
contributes almost two-thirds of the national economy and is by far
the largest of the three major island groupings. Its economy has also
grown marginally faster than the national economy since the 1970s
resulting in a gradual rise in its national share. The shares of the
Visayas and Mindanao have changed little in recent years, and the
latter’s gradually declining share underscores the unfulfilled potential
of this resource-rich region.
The regional income data draw attention to the country’s large

economic disparities. Manila is by far the wealthiest region. Its per
capita income is about 2.75 times that of the national average, more
than double that of the next richest region, and twelve times that of the
poorest. Looking at the period 1985–2003, all of the poor regions,
including ARMM, grew more slowly than the national average of
3.1%. At the other end of the range, the richest region, NCR, grew at
about the same pace as the national average. The fastest growing
region was CAR, which was also second to Manila in terms of per
capita income in 2003.
Overview 23
Poverty and inequality
The Philippines is a high-inequality country compared to most of Asia.

Due to the highly inequitable distribution of physical assets,
particularly land, and to the mix of economic activities (mining,
plantation agriculture, etc.), income inequality is particularly high in
most of the Visayas as well as in Mindanao. ARMM is a notable
exception.
The inequality within regions, not between regions, accounts for over
80% of the national variation in household incomes. High-inequality
regions tend to have low steady-state growth rates compared to their
lower inequality counterparts. Moreover, changes in poverty incidence
(as well as other measures of income poverty) are due largely to
changes in overall per capita income within regions, rather than to
changes in income or asset inequality within or between regions.
Unlike in the PRC or Thailand, the Philippine regions did not
experience any major changes in asset or income inequality during the
past two decades.
The comparatively high level of regional income and asset inequality

blunts the effect of the income growth on poverty. The average growth
elasticity of poverty is quite low in the Philippines compared to that in
most other developing Asian countries. Hence, the country’s
unenviable record on poverty reduction in recent years is due not only
to its low per capita GDP growth rate but also its weakness in
transforming income growth into poverty reduction.
Conflict
Both the special development challenges of the southern region of

Mindanao and conflict more generally must be mentioned in any
discussion of regional development issues in the Philippines. Over

1986–2004, an estimated 91% of Philippine provinces were affected
by ideology-based armed conflict.
Since 1986, a democratic Philippines has found that resolving the

conflict has been just as elusive as it was in authoritarian times. The
pattern of sporadic negotiation interspersed with conflict continued
under the Aquino administration. In 1996, under the Ramos
presidency the Jakarta Accord between the Philippine Government
and the MNLF was successfully brokered with Indonesian cooperation
and the ARMM was established. However, this peace settlement was
also relatively short-lived. If these regions are to have a chance at
development and their residents a chance at better standards of living,
these conflicts must be addressed and resolved.
Population, labor, and migration
There is clear movement of population from poorer to richer regions.

The younger and better educated have a higher propensity to move.
Moreover, families tend to send their children to access the better
quality national educational institutions in Manila and other major
cities and the children generally remain in those places upon
graduation. This brain drain to the major centers is further reinforced
by the spatial patterns of employment creation in the wake of trade
liberalization.
Meanwhile, international out-migration is rising rapidly. About 8

million Filipinos reside abroad, a number equivalent to almost one-
quarter of the domestic labor force. Official estimates suggest that
remittances in 2004 were about $8.5 billion (the third-largest among
developing countries, behind only India and Mexico). Because these
remittances tend to rise with household incomes they may increase
Overview 25
inter-household inequality. And because overseas Filipino workers

tend to originate disproportionately from the better-off regions (and
those which are better connected globally), inter-regional inequality is
also increased.
Infrastructure and integration
Effective infrastructure provision requires competent governance.

First, many infrastructure projects require long gestation periods and
therefore have particular financing and policy predictability
requirements. Second, a number of sectors have “natural monopoly”
characteristics (e.g., power generation, land-line telecommunications,
major trunk roads, international airports), which in turn prescribe a
role for government as regulator, though not necessarily as a provider.
Third, there are major coordination issues: as part of the
decentralization process, there are now many players in the industry,
including several tiers of government, the state-owned providers, and
some foreign firms, as well as a number of regulatory agencies.
Regions where per capita income is higher also have better capacity
(and political influence) to fund better quality physical facilities.
Looking at road density, access to water, electricity and irrigation, and
telephone density illustrates this trend.
Although most indicators suggest a gradual improvement in

availability and quality of infrastructure over the past two decades,
three inter-related problems remain. First, the country is under-
investing in infrastructure. The immediate cause of this under-
investment is the chronic fiscal constraint since capital works are the
first to be cut when the budget must be pruned. A tendency follows to
rely on donor agencies, in the process resulting in an investment
strategy that is short-term in orientation and is poorly integrated.
Donor reliance also compounds the politically-driven bias to favor

new projects over maintenance.
Second, the overall regulatory framework lacks cohesion,

coordination between national agencies and between the various tiers
of government, and a clear division of responsibilities. About 30
national agencies are involved in infrastructure decision-making, yet
in some respects it appears that “nobody is in charge.” Hence, toll
roads are not necessarily consistent with national priorities, and half-
built bridges are a frequent sight in the countryside, particularly in the
aftermath of elections.
Third, national level decision-makers appear unable or unwilling to

deliver the long-term policy predictability and guarantees that major
private (and especially foreign) providers require. The politicization of
large infrastructure investments appears to be unusually severe in the
Philippines.
Regional dynamics
The overwhelming beneficiaries of deconcentration are just three

regions: the two Manila spillovers of Southern Luzon and Central
Luzon and the Cebu-centred Central Visayas. Export growth from
these regions has been rapid. Thus, trade liberalization has not led to
any reduction in industrial concentration. Indeed, depending on how it
is measured, this spatial concentration may actually have increased.
The specific form of the liberalization measures explains these trends.

Exports have been the major source of dynamism, and they have come
overwhelmingly from concessional facilities offered by the
Government. The challenge for Philippine policymakers is to replicate
the strategies that have made export enclaves successful by improving
Overview 27
domestic infrastructure, and offering a level fiscal and regulatory

playing field to all firms in the country regardless of location. In other
words, the challenge is to move to a unified industrial policy strategy.
In emerging patterns of location in some of the new export-oriented

service activities, a significant concentration can again be observed in
and around the capital region. Manila and surrounds have a major
competitive advantage as compared to more distant regions, which
may lack telecommunications and international airports.
Center-region relations
Looking at center-region fiscal and administrative relations, the

assignment of functions to the various tiers of government has been
broadly consistent with public finance notions that power should rest
with the jurisdiction best able to internalize the benefits and costs
associated with providing these services. The main exception is
education which was retained by the central government for political
reasons.
There are serious misalignments of revenue assignments and

expenditure responsibilities between the center and the regions and
also among the regions. These misalignments have at least three
dimensions. First, there is a growing imbalance between the revenue
and expenditure responsibilities of LGUs. Second, little has been done
to downsize national agencies and abolish their regional offices as
their functions have been transferred to local government units
(LGUs). Third, there are perverse incentives among the tiers of local
government. The formula treats cities more favorably than it does
municipalities and provinces. This spurs continuous political pressure
from the municipalities to elevate their status to cities.
Still, the center is not to blame for all the ills. LGUs have generally
been unwilling to raise their own revenue, particularly through
potentially rich sources such as property tax. The widespread
perception is that LGUs are invariably controlled by local elites who
are unwilling to tax themselves. In addition, LGUs have generally
been unable or unwilling to enact major fiscal reforms. Their financial
records are poorly maintained and audited, and they lack transparency.
Moreover, local governments continue to employ a significant
proportion of non-career staff, which indicates that normal recruitment
procedures have been bypassed.
Local institutions and governance quality
Decentralization in the Philippines has been in place for over a decade,

longer than anywhere else in East Asia. In principle, bringing politics
closer to the constituents should make public administration more
transparent, more responsive, and quicker and more cost-effective.
However, the evidence is mixed, the quality of governance has varied
considerably across regions and over time, and the links between
governance quality and development are muted.
Several practical obstacles inhibit the effective operation of a

framework under which competition across regions delivers improved
governance and higher growth. For one thing, standards of governance
may be poor because the level of development is low. Moreover, local
government elections in the Philippines have generally not been
effective in exacting accountability. That is, political success is only
weakly correlated with development achievements. Lags between
improved governance leading to faster development may go beyond
the local electoral cycle of three years, rendering investments in
development (e.g., health and education) politically unattractive as
Overview 29
compared to certain short-term, quick-gestation projects (e.g.,

basketball courts or waiting sheds) with low social rates of return.
Local democracy has been effective at rewarding good performance

and innovation, but less effective at disciplining poor leadership. The
traditional dominance of local wealthy families and clans continues,
for example. A particular disappointment has been the record in the
ARMM.
Although center-region relations are in need of major reform and the

LGU deficiencies are well documented, activist, high-quality LGUs
can make a difference. Quezon City, the largest of Metro Manila’s
cities, is a case in point.
In sum, although the record has been mixed, some achievements have
been made. Transforming institutions, structures, processes, and
(especially) mindsets is a slow, long-term process. The mechanics of
transferring around 70,000 personnel from the central government to
the regions have commenced but the process remains incomplete.
Gradually, competition between the regions is increasing. The annual
Galing Pook awards, which recognize local government excellence
and innovation, are taken seriously. In the regions, citizens perceive
more clearly the sources of poor decision-making in public service
delivery, and local level accountability is generally on the rise. In
addition, in the more internationally connected regions, some evidence
indicates that the imperative of global competition raises standards of
governance and thereby weakens the grip of the traditionally dominant
families; this phenomenon is not observed in the more isolated regions.
Finally, it is important not to forget that the process has been
hampered by the slow national growth rate and persistent fiscal crises.
Conclusion
In this volume, we have provided an overview of our study of issues

and experience in regional development and center-region relations in
the Philippines and other Asian countries. Our core findings are that
countries pursuing decentralization must:
1. Establish a clear, predictable, and stable regulatory environment

that governs center-region administrative and financial relations,
2. Invest in infrastructure with regional developments in mind, and
3. Resolve regional conflicts for the local and national good.
We hope that the lessons and observations here can be adapted and
applied for more effective regional development and, in turn, better
national development.
For Further Information 31
For Further Information
This overview was adapted from the forthcoming book edited by

Arsenio M. Balisacan and Hal Hill, The Dynamics of Regional
Development: The Philippines in East Asia. Accompanying CD-ROM
contains:
• This condensed overview

• Complete first chapter of the book with tables and figures
• Online ordering information for the book
For a list of the book’s chapters and contributors as well as its

ordering information, please see the following pages.
Contents of the Book
Overview
Arsenio M. Balisacan, Hal Hill, and Sharon Faye A. Piza
Part I – East Asia and Beyond
2 Globalization, Geography and Regional Policy
John Weiss
3 Regional Development: Analytical and Policy Issues
Hal Hill
4 East Asian Experience: The People’s Republic of China
Ligang Song
5 East Asian Experience: Indonesia
Budy P. Resosudarmo and Yogi Vidyattama
Part II – The Philippines
6 Local Politics and Local Economy
Emmanuel S. de Dios
7 The Quality of Local Governance and Development under
Decentralization
Joseph J. Capuno
8 Regional Labour Markets and Regional Development in the
Philippines
Emmanuel F. Esguerra and Chris Manning
9 Decentralization and the Financing of Regional Development
Rosario G. Manasan
10 Infrastructure and Regional Growth
Gilberto M. Llanto
11 Development of the Rural Non-farm Sector in the Philippines
and Lessons from the East Asian Experience
Jonna P. Estudillo, Tetsushi Sonobe, and Keijiro Otsuka
12 Regional Responses to Trade Liberalization and Economic
Decentralization
Gwendolyn R. Tecson
13 Local Growth and Poverty Reduction
Arsenio M. Balisacan
For Further Information 33
Contributors
Arsenio M. Balisacan Keijiro Otsuka

University of the Philippines Foundation for Advanced Study
on International Development
Joseph J. Capuno
University of the Philippines Sharon Faye A. Piza
Asia Pacific Policy Center
Emmanuel S. de Dios
University of the Philippines Budy P. Resosudarmo
Australian National University
Emmanuel F. Esguerra
University of the Philippines Ligang Song
Jonna P. Estudillo
University of the Philippines Tetsushi Sonobe
Foundation for Advanced Study
Hal Hill on International Development
Gwendolyn R. Tecson
Gilberto M. Llanto University of the Philippines
Philippine Institute for
Development Studies Yogi Vidyattama
Rosario G. Manasan and University of Indonesia
Philippine Institute for
Development Studies John Weiss
Asian Development Bank
Chris Manning Institute
Ordering Information
To buy the complete book internationally, please contact:
Edward Elgar Publishing Ltd.

Glensanda House
Montpellier Parade
Cheltenham Glos GL50 1UA UK
Tel: +44 1242 226934

Fax: +44 1242 26211
Order/sales enquiries: sales@e-elgar.co.uk
Web site: www.e-elgar.co.uk
The book’s Philippine version is available from:
Ateneo de Manila University Press

Bellarmine Hall, ADMU Campus
Katipunan Avenue, Loyola Heights
Quezon City PHILIPPINES
Tel: +63-2 4265984, 4266001 ext 4612

Fax: +63-2 4265909
Order/sales enquiries: cdecena@ateneo.edu
Web site: ateneopress.org

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An Overview

The Philippines and Regional Development

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Accompanying CD-ROM contains:

Asian Development Bank Institute

© 2006 Asian Development Bank Institute.

About this Volume ............................................................................... 2

Ten Key Lessons and Observations ..................................................... 3

The Philippine Case ........................................................................... 11

East Asian Comparisons..................................................................... 18

The Philippine Experience ................................................................. 20

For Further Information ..................................................................... 31

About this Volume

What kind of decentralization policies are best to promote regional

This volume examines regional development in the Philippines to

Ten Key Lessons and Observations

Trends in the global economy have shaped the economic geography of

2. National growth and regional development depend on investments in key

As a corollary to the first lesson, investments in key public goods,

This scarcity of infrastructure funds has affected regional development

3. Poor regions stay poor without changes in national policy

No major changes have occurred in Philippine economic geography

4. Program neither a success nor a failure

A decade and a half on after the main decentralization program began

transferred to the regions, and some local governments have

The program's success may have been limited by some shortcomings

5. Program poorly executed despite good planning

The Philippine decentralization program was carefully prepared, well-

On paper, the division of responsibilities between the central and local

6. Balance of central-local governments remains a problem

expenditure amounts to just 3.3% of GDP after decentralization, a

7. Government tiers lack coordination

Although the decentralization program was initiated over a decade ago,

8. Governance quality varies among local governments

Governance quality varies considerably across local governments. In

personalistic nature of Philippine politics. Instances exist of emulation

9. Program has had little effect on regional disaffection

Has decentralization ameliorated local disaffection with the center in

In a regional context, the Philippines could be seen as neither a

Nevertheless, the deep-rooted conflict in Mindanao goes on. Socio-

10. Nation-wide policy agenda needed in addition to addressing region-specific

The Philippines requires both a common, nation-wide policy agenda

Regional policy, however, draws attention on diversity; a common

The Philippines: Major Administrative Groupings, 2003

The Philippine Case

Challenging physical environment

A glance at the map on the opposite page immediately draws attention

Unevenly distributed economic activity

Economic activity is highly uneven and is concentrated around the

International trade has become an increasingly important driver of

Uneven living standards

Socio-economic indicators also vary significantly across regions. In

Challenging center-region relations

Philippine policymakers have long grappled with the issue of how to

Lessons relevant to other decentralizing countries

Central governments nearly everywhere are under pressure to devolve

Economic geography and regional development

Regional science is now at the forefront of development issues. In

• What determines sub-national patterns of development, and are

The twin themes of decentralization and globalization unite and

Reasons behind decentralization

Of course, the motives for decentralization vary widely. Economic

Especially in large, spatially diverse countries, disenchantment

In some countries, increased regional autonomy may be an incidental